In the subsequent widespread application of blockchain across industries, it’s hard to find a segment that this technology has not influenced. The real estate industry is not out of that trend when applying blockchain technology to real estate tokenization compared to other sectors. So what is the difference between tokenized real estate and traditional real estate? Let’s find out with GIG in the following article.
Read more: What is real estate tokenization?
Challenges With The Traditional Real Estate Industry
Real estate has been a fascination for many people. However, traditional real estate investment for both private and commercial real estate has had many challenges. Therein, the most common is the issue of transparency. Many real estate deals require paperwork and a lengthy legal process. Usually, this is a straightforward reason for the error, and property buyers face fraud. Dishonesty in real estate purchases is standard in daily practices, and many property investors accidentally find themselves in illegal territory.
Further, real estate transactions are costly endeavors that require property owners to hire outside help to make the transitions possible. This results in high fees for outside help, paying broker fees, attorney fees, and exchange or transfer fees associated with the required middleman.
Another downfall of the traditional real estate industry is the lack of liquidity of assets. Property owners have a tangible asset, but that asset is illiquid when it comes to global real estate. Commercial real estate can become a risk to investors as the value is centrally owned and more complicated to buy or sell. Moreover, a property can become challenging to convert into cash value.
Since there are many barriers to entry into the real estate market, many potential investors are not interested in investing in properties outside of where they live, and fees or regulations can bog down the process. Real estate investment can seem out of reach.
This is where tokenized real estate investment fills the gaps of traditional property investment methods and opens up the market to many new owners.
How does tokenized real estate work?
Blockchain platforms allow for property transactions to occur digitally and in real-time. Property owners can invest in property worldwide and reduce the risk associated with investing in international real estate.
Blockchain technology turns the value of the property into tokenized real estate. It is a time-stamped system of technology that keeps an immutable record of data. This is managed by computers rather than owned by any one party. Decentralization, transparency, and immutable data are all hallmarks of blockchain-based platforms.
The value of a property can be converted into tokenized currency, allowing anyone to buy a real estate asset. Instead of one central property owner, there is now fractional ownership of a single property. Global real estate as well as corporate real estate are accessible to anyone willing to invest around the globe. Moreover, the investment is shared between individuals, and all the parties involved are put into a more democratic and transparent investment system.
Tokenized Real Estate takes the real estate assets developed and distributed into tokens of equal value. As tokenization is highly flexible in its usability, the token could represent ownership in real estate in many ways. The overall type of tokenized real estate can vary just like traditional real estate investing; however, tokenization would allow for little third-party input over the investors. As physical assets would back the tokens, the value of the tokens would fluctuate based on the performance of the asset, similar to traditional real estate investing but with the ease of transfer conferred by the utilization of blockchain technology. These tokens turn illiquid assets into digital assets that can be divided and managed under fractional ownership with the help of smart contracts.
All blockchain technology utilizes smart contracts. These are written codes that self-execute instructions without outside interference. When specific criteria are met, they perform certain tasks while at the same time recording the data. They cannot be manipulated or undermined, which gives users a more precise account of the situation and provides more trust in real estate property transactions.
How Tokenized Real Estate Differs from Traditional Real Estate
Open to everyone
The real estate industry has always been an investment choice for the rich. In reality, many barriers are in place to prevent the majority of the population from getting access to real estate. For example, credit scores, international bank accounts, accreditation, citizenship, financing, access to the right sponsor, cash requirements, and fund managers are some of the significant barriers.
However, blockchain technology makes it easy for anyone interested in global real estate investment to become involved. Blockchain platforms enable potential investors to decide how much they are willing to invest as well as to diversify the properties they support.
Commercial property or private property ownership isn’t the only option available to interested investors. Even peer-to-peer (P2P) rental markets are emerging using blockchain platforms and reducing the barriers to the crowdfunding of new properties.
The level of corruption has always had a heavy impact on this sector. Because there is no transparency in business processes, many businesses often experience tax evasion, fraud, money laundering, etc.
Globally, $800 billion to $2 trillion is laundered each year. And a significant part of that is through real estate programs. Furthermore, it is estimated that money laundering occurring in real estate is around $1.6 trillion. That’s a big problem the government is having a hard time-solving. So if the business model starts to incorporate transparency, it can fight corruption.
For tokenized real estate, the data on the blockchain platform is immutable, real estate owners have greater trust in the real estate industry. The data is transparent, and the transactions are open to review.
Peer-to-peer (P2P) ownership ensures that fewer mistakes or frauds occur. Blockchain technology improves the overall picture and perspective of the real estate industry through the sharing of data on global real estate transactions.
Reduced risks & costs
Investing in real estate is often very expensive. But to do that, they have to pay a massive amount of fees in various stages. For example, there are broker fees, exchange fees, taxes, attorney fees, transfer fees, investment fees, etc.
Also, as the number of intermediaries in this sector is quite overwhelming, raising your overall budget for the investment. More so, you also have to keep in mind that you will need to use accountants and consult lawyers to keep your tax records clean as well.
Investing in tokenized real estate reduces risks for potential investors. Since the property’s value is now liquidated, investors can buy and sell their tokens of investment in real-time legally. There are fewer risks to committing fraud or engaging in shady business practices.
To help reduce the risk & cost for all parties involved, the smart contract system of blockchain technology removes the risk of tampering or manipulating the data. Property owners can trust that their tokenized real estate investments are secured, quickly acquired or transferred, and in compliance with global real estate practices.
More importantly, real estate assets are not controlled by intermediaries. Instead, brokers, lawyers, and banks usually involved in the traditional real estate industry play a less direct role in tokenized real estate investment.
New platforms are able to use blockchain technology to provide property listings, facilitate payments, and assist with legal documentation. In the long term, buyers and sellers get more value for their money by reducing the costs associated with needing intermediaries to negotiate and manage real estate investment opportunities.
Increasing liquidity for real estate
The liquidation of real estate assets is often quite tricky. It’s one of the primary reasons why this sector really needs to change. Here, real estate liquidity means how quickly you can convert your real estate assets into cash. Since the cost and value of real estate assets are often quite high, not many people are willing to buy the property when you need it.
By tokenizing the asset’s value, all parties involved own a piece of the real estate’s liquidity and can easily exchange, buy, or sell. At any point, a real estate investor may choose to buy more tokens in a property, sell some, or sell all of a particular property’s tokens. This completes an immediate transfer of wealth directly between investors through a P2P peer-to-peer network.
Decentralization with fractional ownership
Commitment is an issue that prevents the middle class from ever considering real estate as a good option. In reality, this type of investment needs a lot of capital upfront. Furthermore, only a handful of higher classes can show that much capital upfront.
Investors have to search for other expensive alternatives to reach pricing commitments in many cases. Also, as the market is volatile, it’s a considerable risk to bet this much money on an asset. Although you may have an excellent credit score in your own country, you can’t use that for international markets.
Instead of investing in single real estate, blockchain allows for many parties to be involved in the ownership of an asset. This is known as fractional ownership.
Fractional ownership is making the entire process of real estate investment more democratic as the wellbeing of an asset is held in the hands of several parties. Transparency and accountability play a more important role than ever before.
If a property should become less than ideal, blockchain technology allows it to be transferred to new owners quickly and cheaply. On the other hand, an ideal property can see a boost in investment opportunities, and new properties can find multiple sources of investment relatively easily.
Tokenized real estate investment is a cutting-edge way to become a property owner and make the most of your investments. Tokenized real estate has many advantages and reduces the risk associated with property transactions. You can increase your wealth and secure your place in the global real estate market with peer-to-peer technology.
Subscribe to GIG Dollar to stay updated with the latest news on blockchain, cryptocurrency, digital asset investment, etc.
Telegram Channel: https://t.me/gigdollario
Telegram EN: https://t.me/gigcapital
Telegram VI: https://t.me/gigvietnam